Zoetis (ZTS)

Animal health company Zoetis (NYSE:ZTS) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 1.4% year on year to $2.22 billion. The company’s full-year revenue guidance of $9.5 billion at the midpoint came in 1.8% above analysts’ estimates. Its non-GAAP profit of $1.48 per share was 5.8% above analysts’ consensus estimates.

Company Overview

Originally spun off from Pfizer in 2013 as the world's largest pure-play animal health company, Zoetis (NYSE:ZTS) discovers, develops, and sells medicines, vaccines, diagnostic products, and services for pets and livestock animals worldwide.

The branded pharmaceutical industry relies on a high-cost, high-reward business model, driven by substantial investments in research and development to create innovative, patent-protected drugs. Successful products can generate significant revenue streams over their patent life, and the larger a roster of drugs, the stronger a moat a company enjoys. However, the business model is inherently risky, with high failure rates during clinical trials, lengthy regulatory approval processes, and intense competition from generic and biosimilar manufacturers once patents expire. These challenges, combined with scrutiny over drug pricing, create a complex operating environment. Looking ahead, the industry is positioned for tailwinds from advancements in precision medicine, increasing adoption of AI to enhance drug development efficiency, and growing global demand for treatments addressing chronic and rare diseases. However, headwinds include heightened regulatory scrutiny, pricing pressures from governments and insurers, and the looming patent cliffs for key blockbuster drugs. Patent cliffs bring about competition from generics, forcing branded pharmaceutical companies back to the drawing board to find the next big thing.

Zoetis competes primarily with other major animal health companies including Boehringer Ingelheim Animal Health, Merck Animal Health (a division of Merck & Co.), Elanco Animal Health (NYSE:ELAN), and IDEXX Laboratories (NASDAQ:IDXX) in the diagnostics space.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $9.29 billion in revenue over the past 12 months, Zoetis has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Zoetis grew its sales at a decent 7.9% compounded annual growth rate. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Zoetis’s annualized revenue growth of 7.1% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

We can better understand the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 9.6% year-on-year growth. Because this number is better than its normal revenue growth, we can see that foreign exchange rates have been a headwind for Zoetis.

This quarter, Zoetis reported modest year-on-year revenue growth of 1.4% but beat Wall Street’s estimates by 1.2%.

Looking ahead, sell-side analysts expect revenue to grow 1.7% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Zoetis has been a well-oiled machine over the last five years. It demonstrated elite profitability for a healthcare business, boasting an average operating margin of 35.5%.

Analyzing the trend in its profitability, Zoetis’s operating margin rose by 1 percentage points over the last five years, as its sales growth gave it operating leverage. The company’s two-year trajectory shows its performance was mostly driven by its recent improvements. These data points are very encouraging and shows momentum is on its side.

In Q1, Zoetis generated an operating profit margin of 36.5%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Zoetis’s EPS grew at a remarkable 10.2% compounded annual growth rate over the last five years, higher than its 7.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Zoetis’s earnings to better understand the drivers of its performance. As we mentioned earlier, Zoetis’s operating margin was flat this quarter but expanded by 1 percentage points over the last five years. On top of that, its share count shrank by 6.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, Zoetis reported EPS at $1.48, up from $1.38 in the same quarter last year. This print beat analysts’ estimates by 5.8%. Over the next 12 months, Wall Street expects Zoetis’s full-year EPS of $6.02 to grow 2.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Zoetis has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 21.5% over the last five years, quite impressive for a healthcare business.

Taking a step back, we can see that Zoetis’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Zoetis’s five-year average ROIC was 28.7%, placing it among the best healthcare companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Zoetis’s ROIC averaged 2.7 percentage point decreases over the last few years. Only time will tell if its new bets can bear fruit and potentially reverse the trend.

Zoetis reported $1.72 billion of cash and $6.75 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $3.81 billion of EBITDA over the last 12 months, we view Zoetis’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $39 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Zoetis blew past analysts’ constant currency revenue expectations this quarter. We were also glad its full-year EPS guidance outperformed Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 1.3% to $160.28 immediately following the results.

Updated: July 8, 2025 at 11:54 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Zoetis.

There are a lot of things to like about Zoetis. First off, its revenue growth was decent over the last five years. Plus, Zoetis’s impressive operating margins show it has a highly efficient business model, and its stellar ROIC suggests it has been a well-run company historically.

Zoetis’s P/E ratio based on the next 12 months is 25.6x. This valuation tells us that a lot of optimism is priced in. Zoetis is a good one to add to your watchlist - there are companies featuring superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $195.04 on the company (compared to the current share price of $157.80).